This invention relates generally to retirement planning. More particularly, the present invention relates to methods and systems for managing assets and asset allocations to fund retirement.
Individuals often prepare for retirement by first determining a desired retirement income and then preparing a plan to achieve the desired retirement income, which generally can be anywhere between 40%-80% of the pre-retirement income, or more, based on the individual's retirement goals and concessions, e.g., travel, new car purchases, etc., for the life of the individual. Financial planning for retirement is generally separated into two time periods: pre- and post-retirement. During the pre-retirement phase, the individual's goal is to accumulate sufficient assets, such as savings, investments, etc., to achieve the desired retirement income. The post-retirement goals are to manage the accumulated assets in order to generate a desired level of income and to sustain an adequate level of income for the life of the individual, which now can exceed 30 years beyond the individual's retirement date.
Retirement financial planning is, consequently, uncertain insofar as it is contingent in part upon the life of the individual, and the two elements of the post-retirement goal work against each other. For individuals who are not in a position to leave behind a sizable estate, the uncertainty over how long the individual will live invariably negatively impacts many individuals that are determined, in retrospect, to have been either over protected for retirement, e.g., they do not exceed their life expectancy, or under protected for retirement, e.g., by exceeding their life expectancy. Over-protected individuals generally spend less and/or save more than they may otherwise have desired, either in the pre- or post-retirement time periods, or both. The impact on under-protected individuals may be more serious insofar as they may be forced to live with relatively little income, e.g., Social Security alone, during many of their years after retirement.
The assets accumulated for retirement may include cash, securities, deferred annuities, such as fixed or variable annuities, real and personal property, etc., which are generally drawn upon for retirement income. These types of assets, however, provide the finite source of income that either gets under withdrawn or underutilized by the over-protected individuals or that gets depleted by the under-protected individuals as explained above. Many individuals have addressed uncertainty in this respect by using some of their retirement assets once they reach retirement to purchase immediate annuities (annuitization) that provide guaranteed income for life that begins immediately. This product addresses both retirement goals by providing a reliable source of income throughout retirement and by guaranteeing the income will continue as long as the client lives, no matter how long that may be. The amount of income paid from the immediate annuity is generally based on the size of the investment, e.g., the purchase price, the individual's age at the time of the purchase, gender, interest rates, etc. For example, at the present time, a male individual that invests $100,000 in an immediate annuity at the age of 65 with a life expectancy of about 15 years can typically expect a yearly income of about $8,000-9,000 depending on the interest rate.
Although immediate annuities prove to be a good value for those who exceed their life expectancy, it can be, in retrospect, a lesser value for those who do not live beyond their life expectancy. Moreover, because immediate annuity payments begin immediately, a sizable investment is required in order to derive a modest yearly income. Many individuals who might otherwise benefit from the risk-reducing benefits of immediate annuities find these aspects of immediate annuities unappealing and therefore avoid immediate annuities altogether. Moreover, many of these people also do not adequately manage their assets and withdrawals to account for longevity, e.g., the very real possibility of exceeding their life expectancy. Accordingly, there is a need for investments for use in funding retirement that better deal with the uncertainty associated with longevity, and for methods to illustrate and protect against longevity risk (one element of the post-retirement goal) that is split off from a “whole retirement” income source (the other element of the post-retirement goal).
In addition, some individuals who desire a product that addresses both elements of the post-retirement goal, such as an immediate annuity, may want to pre-fund such an income source in order to take advantage of the time prior to retirement, when such an income source can be built up through tax deferred savings, and to take advantage of mortality credits that may accrue to pooling such savings and making them available only to those in the pool who reach retirement age, much in the way that corporate defined benefit pensions have traditionally enabled individuals to build up a retirement income during their working years. As such plans, which were generally funded by employers as a benefit, are much less prevalent than they were in the past, people may desire to create their own “personal pension.”